The Chequers’ White Paper: towards a bespoke EU/UK trade agreement?

The UK Government has published its long-awaited Brexit White Paper setting out its proposals for the future relationship between the UK and the EU after the end of any transitional/implementation period which - according to the draft withdrawal agreement - will expire at the end of 2020.

As part of these negotiations, the UK Government seeks a bespoke model whereby the UK’s future relationship with the EU would be built around several separate agreements, each covering different areas of economic activity and security co-operation, with a core free trade agreement (FTA) within an overarching institutional framework which draws much from existing association agreements (such as that which the EU has in place with Ukraine). We consider below some of the key legal ramifications of the White Paper.

1. Limited alignment for services and digital markets

The White Paper distinguishes between services and digital on the one hand and goods on the other. The UK Government is proposing less alignment than currently in place with the EU in relation to services. New arrangements for services which are designed to provide regulatory flexibility would therefore be put in place, although it is acknowledged that any such arrangements could not replicate current levels of market access between the UK and the EU.

In particular, a new economic and regulatory arrangement for financial services is proposed which will not replicate the passporting regime. The UK Government recognises that the EU would not accept continued mutual recognition of regulatory regimes and therefore envisages a bilateral equivalence arrangement between the UK and the EU in which each party will have autonomy over decisions regarding access to its market. Importantly, the Government wants such arrangements to go beyond existing third country equivalence regimes (which cover more than 30 overseas jurisdictions). It does not believe that such regimes are sufficient to deal with the deep interconnection of the UK’s and EU’s financial markets and therefore seeks an expanded “enhanced equivalence” regime.

For his part, Michel Barnier, the EU’s chief Brexit negotiator, questioned why the equivalence system, which in his view works well for the US industry, should not also work for the UK. In Mr Barnier's words, this "integrates financial markets and facilitates the work of financial operators in the EU and the foreign jurisdiction" and “enhanced equivalence” runs contrary to the principle that equivalence within EU regulation is to be determined unilaterally by the EU. In effect, this would afford a considerably lower level of direct access than UK firms currently enjoy through the passporting system. Moreover, the EU would have the power to withdraw the equivalence recognition at short notice.

In saying that it wants a more aligned arrangement than that proposed by Mr Barnier, the UK Government is effectively seeking a mechanism that more closely approximates to the mutual recognition regime in all but name, but nevertheless falls short of the degree of access to European markets that many UK financial services firms would ideally like to retain following Brexit. The Government is also seeking a framework of common principles for the governance of the relationship, with extensive cooperation between regulatory and supervisory authorities and with transparent consultation processes if either party wishes to change its regulatory landscape. Any changes would need to be introduced in a phased and predictable manner to afford businesses certainty of the regulatory environment.

The White Paper is also significant in what is does not say. Together with the Government’s statement following its meeting at Chequers on 6 July, the Government appears to suggest that regulatory flexibility, and accordingly less alignment with the EU, will provide potential economic advantages for the UK’s financial sector. However, the Government is yet to substantiate these suggestions and some regulated firms may be sceptical as to whether the benefits of regulatory flexibility will outweigh the potential costs of the loss of the existing passporting regime.

In addition, the proposed arrangements for services would provide a system for the mutual recognition of professional qualifications and mutually beneficial arrangements for professional and business services. It remains to be seen whether the EU can accept continued mutual recognition in this area if the UK abandons membership of the Single Market.

In relation to the EU’s Digital Single Market, it appears that the UK Government does not foresee the UK tracking new EU legislation and the White Paper is not particularly detailed in this respect. However, the White Paper highlights the continued cross-border flow of data as being a key area, indicating that the UK will seek an adequacy decision from the EU in relation to transfers of personal data.

2. Establishing a free trade area for goods

The UK Government seeks much closer alignment with the EU on goods than on services by proposing to establish a free trade area for goods. The proposal for a free trade area includes a phased introduction of a new Facilitated Customs Arrangement (FCA), which if agreed “would remove the need for customs checks and controls between the UK and the EU as if they were a combined customs territory, which would enable the UK to control its own tariffs for trade with the rest of the world and ensure businesses paid the right or no tariff”.

The operation of the free trade area would be governed by a common rulebook, with the UK committing to on-going harmonisation with EU Single Market rules on goods to the extent necessary to provide frictionless trade at the border between the UK and the EU. Conversely, the UK seems to reserve the right not to abide by Single Market rules which are not checked at the border. For example, in the context of agri-food products the White Paper indicates marketing and labelling requirements would not form part of the common rulebook because they do not govern the manner in which products are produced but determine how they are presented to consumers. In relation to those rules that would form part of the rulebook, the White Paper notes that the UK will effectively become a “rule taker”. Whilst the UK Parliament could legislate to depart from the EU rulebook, the Government recognises that any such departure would “have consequences” for the trade relationships between the two parties.

In order to preserve frictionless trade, the FCA would operate a tiered approach to the payment of tariffs:

If the destination of the goods can be “robustly demonstrated” at the UK border, the importer would pay either the appropriate UK tariff if such destination is the UK or the EU tariff if such destination is the EU. It appears that this option will be available to so-called “trusted traders”, the criteria for which are not detailed.

If the destination of the goods cannot be “robustly demonstrated” at the point of import, the higher of the applicable UK or EU tariff would be payable. Once the destination of the goods is identified at a later stage, the importer could obtain a refund of the difference between the tariffs if the lower tariff applies.

Once within the free trade area, zero tariffs would apply to goods moving between the UK and EU. In addition, the White Paper contemplates mutual compliance activity, enabling relevant goods to be tested only once before being sold in the UK and EU markets. This may take the form of existing conformity assessments (such as type approvals for vehicles) and manufacturing and quality assurance processes (such as Good Manufacturing Practice guidelines) to ensure production methods are respected.

The UK therefore in essence wants the EU to delegate to it the policing and enforcement of the EU’s external trade and customs rules. This poses a number of questions. Politically, would any such arrangement be acceptable to the EU? Legally, how would disputes concerning the interpretation of such rules (which are frequent in practice) be dealt with? Whilst UK courts could in theory determine questions of the application of EU law, the Court of Justice of the European Union (CJEU), is the ultimate arbiter of EU law. However, following Brexit, UK courts would no longer be able to refer questions of interpretation to the CJEU. It is conceptually difficult to see how the UK could be entrusted to enforce what is effectively EU law without being subject to the full jurisdiction of the CJEU.

Pending agreement on the terms of any such FCA and its phased implementation, it is presumed (although the White Paper does not explicitly state so) that the UK may have to remain in the Customs Union beyond the end of any transition / implementation period. Unless otherwise agreed with the EU, it is unlikely that the UK could bring into force any new trade arrangements with third countries until such time as the UK ceases to be in a customs union.

3. Repatriation of immigration policy

Immigration was a key issue in the referendum and is a central part of the withdrawal negotiations. The White Paper reaffirms the end of free movement of people from EU Member States to the UK from 1 January 2021 (after the end of the implementation period) while confirming that the rights of EU citizens resident in the UK before this date will be protected. The White Paper also points to a new immigration bill which will bring post-Brexit EU migration into UK domestic law (by repealing the current EEA Regulations which implement free movement treaty rights) but does not provide detailed proposals on how post-Brexit EU migration will be handled, leaving the option open for reciprocal preferential status to be negotiated as part of a trade deal. If such status is not negotiated, the UK's plan is to bring migration policy for EU migrants into line with the Immigration Rules currently in place for non-EU migrants. The Migration Advisory Committee (MAC) is due to publish a report on this issue in September 2018 and more detail should be available from then.

Tourists and business visitors would continue to be able to come to the UK for short visits without the need for a visa, which is in line with the current arrangements with Europe and many other countries around the world. The UK would extend the current Registered Traveller Scheme to EU nationals in order to enable smooth access at the border (for example, use of electronic gates) and the White Paper states that EU nationals would not routinely be questioned or be required to justify their visits to the UK.

For workers, there is an indication that special provisions will be considered for temporary employment related assignments to the UK though no detail is provided. Currently, some paid work is permitted without a visa (such as internal auditors or those installing equipment) and EU nationals can expect to benefit from these provisions. Non-EU migrant skilled workers currently use the sponsored Tier 2 work permit route in most circumstances and it is expected that future EU migration will be facilitated through this system.

The UK acknowledges the importance of self-employed workers, business owners and investors coming to the UK though does not commit to any special provisions for these groups. The ability of EU citizens to move to the UK and the right to establish could be catered for under the existing Tier 1 (Investor) or Tier 1 (Entrepreneur) visa routes, but they have high barriers of entry which act as a deterrent.

Students and young people are also discussed with the Government proposing a UK-EU youth mobility scheme modelled on the current arrangements in place with, for example, Australia, Canada and New Zealand. If the current Tier 5 Youth Mobility Scheme visa was replicated for the EU, it would grant people aged 18-30 a two year visa to work in the UK without restriction. The White Paper is keen to protect the UK's higher education sector, though no mention is made of special arrangements for EU students so it is expected that they will require sponsorship under the existing Tier 4 student visa route.

The White Paper is silent on the movement of low-skilled workers who are not able to apply for visas if from outside of the EU unless they are a dependent of a UK resident. Given the labour shortages in sectors such as agriculture, it is surprising that no mention is made of a seasonal agricultural worker scheme or the consideration of a sector based work permit though these issues would presumably be covered in the upcoming immigration bill or the proposed youth mobility scheme may be deemed to be sufficient. The MAC may cover this in its upcoming report.

4. Dispute resolution: Independent arbitration panel

The UK Government proposes an independent arbitration panel to resolve disputes between the UK and the EU, whilst acknowledging an indirect role for the CJEU. The panel would not be competent to interpret matters of EU law (for instance, in relation to the common rulebook on trade in goods), but would need to refer such questions to the CJEU, which is exclusively competent to do so. Such a referral mechanism is likely to be similar to the existing preliminary reference procedure, whereby the arbitration panel would have to resolve the dispute in a manner that is consistent with the CJEU’s interpretation. The White Paper indicates that decisions of the arbitration panel would be binding, necessitating provision in UK domestic law to recognise such binding effect. This also raises the question of the role of the UK courts in any such procedure. For instance, are there circumstances in which decisions of the arbitration panel could be challenged before the courts and if so on what grounds?

5. Civil judicial co-operation

The UK will seek a new bilateral agreement with the EU in relation to the mutual recognition and enforcement of judgments in civil, commercial, insolvency and family matters. The White Paper indicates that such an agreement would build on the principles established in the Lugano Convention (to which non-EU countries are already party). Any such agreement would have important consequences for the continued choice of the UK as a significant legal forum for resolving disputes.

Conclusion

Overall, the bespoke model for the future UK / EU relationship put forward in the White Paper may well be regarded by some as seeking to create a shadow relationship to EU membership which is carefully designed to preserve frictionless trade while navigating around the self-proclaimed “red lines” of the UK Government. It could accordingly also be seen by the EU as an elaborate form of “cherry picking”. The White Paper is therefore likely to be the subject of heavy negotiation domestically and in Brussels.